Understanding Bitcoins

Cryptocurrencies are digital currencies that operate independently of a central bank. The most popular cryptocurrency by far is Bitcoin.

Holding Bitcoins is a bit like living in the Wild West. It is a highly volatile investment and a fairly restrictive form of currency. You never know what’s going to happen. Bitcoins can lose value suddenly, suffer from a lack of governmental oversight, and offer little to no protection in the case of loss or theft.

Bitcoins are disadvantageous for the average person for multiple reasons:

  1. Its use is restricted in many cases. While there are a growing number of merchants willing to deal with Bitcoins, there still aren’t very many. How useful is this form of currency from a practical standpoint? You can’t take it to your local big box store and load up on groceries.
  • If you’re considering purchasing Bitcoins strictly for purchasing goods or services, think again. Other forms of currency are more widely accepted and convenient.
  • There’s no advantage to using Bitcoins at most places, unless you require the anonymity that Bitcoins provide.
  1. The future of Bitcoins is uncertain. Right now, there’s little to no government regulation of Bitcoin, and that’s exactly why many users have adopted this form of currency.
  • Many financial experts believe that governments will eventually get involved and impose some degree of regulation. When this happens, it is speculated that Bitcoin users will cash out and abandon the system.
  1. Bitcoins can be volatile. Unless you’re interested in currency speculation, the volatility of Bitcoin could be considered a disadvantage. It’s possible to see major fluctuations over short time periods, causing the value of your Bitcoin holdings to potentially dip very quickly.
  • It’s more than a little stressful to hold a currency that might drop precipitously in value over hours or days.
  • Bitcoin values are primarily based on supply and demand for the currency, which can fluctuate dramatically.
  1. Bitcoins lack oversight and guarantees. A complicated system exists to keep Bitcoin on the straight and narrow. However, it lacks a formal regulating body. Your bank account is safe from fire, robbery, and just about anything else you can imagine. However, if your Bitcoin wallet is lost or corrupted, what happens then?
  • The government has been unable to define Bitcoin, much less show an interest in chasing down Bitcoin thieves.
  1. Bitcoins may be difficult to maintain. Bitcoins can be easier to keep safe than cash, but it’s much less safe than keeping money in your bank account.

Bitcoins may have a few desirable characteristics for those interested in speculative currency investing. However, for the average consumer Bitcoins provide more disadvantages than advantages. It will be interesting to see how cryptocurrencies, like Bitcoins, evolve over time. As globalization and digitization continues, these types of currencies may play a broader role for the common investor in the future.